The relevance of standard costing
Standard cost analysis is applied in real-life companies, “Faith’s country Primitives.” The importance of a conventional costing system is analyzed as the company implements the method and provides detail calculation of overhead and materials in an excel spreadsheet. The implementation of standard cost analysis focuses on essential sections in the article, such as case attachments, instructions, excel spreadsheets, and suggestions. The vital features of the usual cost system are not explicitly mentioned because the data presents the technical aspects and does not provide essential notes on the standard costing system. Faith’s country primitives company produces toys for home décor. A standard costing system is implemented, and the reports are prepared for project works to be analyzed. The importance of planning and control is missing, while the features of the standard cost system are not highlighted. Therefore, the characteristics of the usual cost system are not satisfied in Faith’s country, Primitives. In a manufacturing firm, standard cost analysis is essential and useful while using cost accounting tool. The organization covers fixed overheads, flexible overheads, and efficiency aspects while preparing budget variance. Due to the complexity of raw materials and cost, the organization considers a standard costing system. The calculations are primarily involved while the content accessible, cost improvement, and analysis are found in the process of standard costing technique. The articles are efficiently delivered with cost improvement in the production process.
The pedagogical aspect is planning and control, which are not considered by the company. The features of the standard cost system are not presented in the report, due to technical and calculative nature of the article. The standard costing system is applicable, and it has been observed that the company has appropriately used cost control while preparing the budget. Direct materials, direct labour, and variable manufacturing overhead are consequently analyzed, which seems to provide actual results for Faith’s country primitives. The flexible budget variance report consists of variable costs, direct materials fiber, direct materials, cotton, direct manufacturing labor, direct materials stuffing, and variable manufacturing overhead (Gašová 2017). The features are not directly highlighted in the report, but they are indirectly applied in the calculation of the data input worksheet. The process of standard costing includes budgeting, analysis, control, and interpretation, which are not reflected in the article. Therefore the report demonstrates the use of a conventional costing system in a real-life company.
Still, the significant features of planning budget, controlling cost, and cost improvement techniques are missing. Standard cost is provided while culminating the price and efficiency of a product. Extensive use of standard cost has produced effective results for Faith’s country primitive. Advance skills and importance of data is introduced while implementing the standards cost system in Faith’s Country Primitive.
Target costing and comparison with standard costing
Target costing is an accounting system that ensures advance plans for the price, product, and margin for a new product. Target costing is a tool that continuously monitors the product life cycle from the design phase to the actual end phase of a product life cycle (Becker & Stern 2016). The product phase is planned, maintained, controlled, and evaluated to achieve consistent profitability of a firm. Target costing is an accounting system that best suits the company to which the profitability index is expected to be higher. The standard approach is based on the department’s view and is competent to the market price with market penetration and geographical coverage. While target costing is not only a method, it is a management technique that determines the market condition based on the price of the product (Jrirh & Talal 2011). Therefore, the price of a product is decided in advance based on market conditions, similar product, competition level, and switching cost. These factors are the core aspects that are primarily controlled over the selling price. Management’s focus is to consider product operational cost and service aspects while determining and managing the price of the product. Proactive measures, planning, cost reduction practices, and cost control are the significant aspects in calculating the price of the product from the design phase to product life cycle stages.
Standard costs are set and are based on an estimation of material, overheads, and labor aspects. Therefore it is considered to be a predetermined cost. Target costs are decided based on the target price and reasonable profit of the business. The primary purpose of the standard cost system is to focus on the value of the product. In contrast, the target cost system is decided based on the competition of the market and market condition (Horngren, Datar & Rajan 2015). Control techniques are observed in standard cost as the key element is to control the value of the product while analyzing and planning the product price. Planning is an essential feature in terms of target cost, which is a tool to reduce the cost with the help of planning and design the stages of the product life cycle. Standard costing is the traditional costing method, while the target costing system is the modern cost system that helps to derive the significant aspects in determining the price of the product (Bedolla, D’Antonio & Chiabert 2017). The calculation of the traditional/standard costing system is inwardly focused.
In contrast, target costing considers external factors to determine the price of the product and calculate the target cost by finding the deduction of the profit. Standard costing is calculated for an existing product, while target costing ensures the price of a planned product or a new product in the market. Therefore, there is a difference in the planning phase in terms of the target market and setting standards in the standard cost of the product in the product life cycle.
In both the methods, planning and control are the primary decision making elements to determine the price of the product. These are two accounting systems that tend to ensure profit for the firm and increases sales volume. The target costing system is the modern accounting system that controls cost and plans the significant phases of the product life cycle (Dimi & Simona 2014). In the design stage, the cost is estimated by the product manager and is, determined with the importance of price in the market. The market condition is analyzed, and the amount of the product is fixed based on several aspects of the business.
Relevance of target costing
The target costing method is derived from a global approach that includes a strategic management approach. The new cost technique considers price determination throughout the product life cycle. There are significant changes that occur in terms of new products and ensure market demands and production aspects with the latest automation based technique. The industrial design has quickly made importance in the accounting systems and is practiced by several companies (Jayeola & Onou 2014). Target costing ensures the meeting point of the market incompetence with the product value. The product considers the company and market relation in determining the price of the product and finding each phase of the product life cycle stage. In an uncertain business environment, it isn’t straightforward to implement the target costing system in a business. At each stage, the product cost may change with the change in the system/process/method. At times, there are hindrances in calculating the value of the product based on the product life cycle stage.
From the target costing article, the use of the target costing method by SC International is represented in the report. SC International is a steel processing field and has used the target costing method based on experience accumulation. There are several considerations that the company has focused on using the target costing system as an essential means of indicating strategic reflection and focusing on the stages of new products (Pacaux-Lemoine 2017). Consequently, the target costing method is relevant based on the latest products as discussed because it is the modern tool to determine the price and consider strategic management analysis. A competitive price is determined based on market conditions and competitive pricing strategies. A cost limit is addressed based on the product profitability and product life cycle stage. Based on the real-life example as per the article, the use of target costing method is the heart of strategic management while determining the cost of the product and considering lifecycle. The four dimensions are integrated while determining new value and performance at International SA.
Within new product sales, the cost of the product is determined with the study of the newly proposed product in the market and current products in the market. There is a critical role that the product price and cost play while determining the changes to be addressed in the new product. A product range improvement is discussed in the case of SC International while considering three new products of the company. As such, there is predictable profitability increased by 16 by the year 2017 to 109 % rise in 2019. Therefore, the condition of an economic entity is considered, and the overall growth of the new product is found with a significant increase in the profit margin and the possibility of new products in the market. However, analysis of the product life cycle is appropriate and should be considered in all the phases starting from the design phase, introduction, maturity, and saturation state. Increased profitability and productivity is addressed with permanent cost reduction techniques. The final decision of product re-design and re-conception can be controlled while considering several factors that influence the product usability value.
Recommendations
The two systems that are analyzed are the standard costing system and the target costing system. For contemporary organizations, a conventional costing system can be used for control purposes, and the target costing system can be used for planning missions. The reason for considering the particular order for a specific purpose is information and is based on the conclusion.
The standard costing system helps to control the cost of the product while setting standards and considering the material, labor, and overhead expenses. Standard price ensures a standard value that is provided with an effective instrument of controlling the cost of the product. A budget is prepared based on the cost control aspects; therefore, the planned value is then considered by the organization to meet the significant aspects of growth. The contemporary organizations focus on standard means, control the cost, and make improvements in the price based on expenses incurred in the business (Silvester 2017). The use of a conventional costing system is based on the control process mainly as such is can be used in considering direct costing, job costing, absorption costing, and controlling the process method. Standard costing is a system that fits in one way to provide a formal basis of growth of the organization in terms of controlling production cost and analysis of variances, if any. However, the standard costing technique assists in setting the budget and controls cost with a comparison of actual value to standard cost.
Contemporary organizations can use target costing for planning purposes. The price of the product is determined based on the planning procedure of the product life cycle stage. Therefore the manufacturers plan to focus on management perspective while learning proactive measures and considering cost reduction practices. The cost reduction practices are scheduled in each step while considering market driving costing, product-level target costing, and component-level target costing (Aurelian 2015). Therefore the price of the product is determined by several factors. Cost planning is an important aspect to be considered by contemporary organizations as it tends to calculate the price based on the design stage to the product life cycle stage (Meissner, Ilsen & Aurich 2017). Planning and projecting the product price is the critical cost management aspect. Costing is all about planning and anticipating the cost of a product and determining the results in advance. Strategy planning is considered in cross-functional activities and is believed to combine the results of product life cycle stages (Al-Khasawneh, Jrairah, Endut & Rashid 2019). Product planning decisions are made that affect product success in the market. Indirect overhead and other expenses are calculated in the design stage, production stage, and marketing stage.